As for the hate side of the relationship, there remains no conclusive deal for Australian miners to provide Chinese steel producers with iron ore after the last one expired earlier in the year. China had hoped that it could negotiate a deal similar to the one it concluded with the world's largest iron ore concern, Brazil's Vale. (If you are familiar with the term "pattern bargaining" in union negotiation jargon, what Chinese steelmakers seek would be similar.) However, Australian firms have been holding out for higher prices for a number of reasons identified below. In the meantime, the rhetoric emanating from both Australian firms and the Chinese steelmaker's association is becoming increasingly combative. From the FT once more:
Rio Tinto is seeking partnerships with Chinese steel and construction companies to help develop a $6bn (£3.08bn) West African iron ore mine, in what would be the mining group’s largest deal with
, its biggest customer. Sam Walsh, head of Rio’s iron ore division, said in an interview with the Financial Times that the Simandou project in China Guineacould eventually supply steelmakers in Europe and Asiawith up to 170m tonnes of iron ore a year. The first phase of the mine’s development targets 70m tonnes a year by 2018.
“Europe is the natural market (for the Simandou ore), but there’s a lot of interest from
Asia. One option would be to bring a Chinese partner into the project. Our preference would be to have a steel company that is allied to a construction company,” said Mr Walsh. The Chinese steelmaker would agree to buy a portion of Simandou’s output on a long-term “off-take” contract while a Chinese construction group would be valuable in making sure the mine is built on schedule and on budget, at a time of rising costs.
Rio Tinto is the world’s second largest producer of iron ore after Vale of Brazil, and plans to expand its output significantly in the next decade to take advantage of strong Chinese demand. The bulk of its production comes from its huge mines in
Western Australia’s iron-rich Pilbara region, but Riois also looking for new sources of iron ore worldwide. The Simandou deposit was large and high-grade, said Mr Walsh, and Guineahad the potential to be “the third largest precinct for iron ore in the world” after Braziland . “The Simandou ore body is stunning.” But Simandou lies 750km from the sea and the lack of infrastructure in the area will be a challenge. Australia Riowill have to build a railway from scratch to transport the ore to the coast for export.
Mr Walsh said
Riohad spent $300m on Simandou so far, out of a projected total cost of $6bn, and would make a final decision on whether to go ahead with the mine in 2009. He added that he hoped to make progress in finding Chinese partners for the project “this year”, so they could be involved in the design of the mine and the infrastructure.
Chinais Rio’s biggest customer and this year Chinalco, the Chinese metals group, shocked the market by buying a 9 per cent stake in Rio. Since then Riohas been increasingly talking about how it could co-operate with Chinese companies on new mining projects.
Rio has been emphasising the strength of its growth prospects – such as Simandou and the Oyu Tolgoi copper project in
– as part of its defence against a hostile takeover bid from rival BHP Billiton. It argues that BHP’s offer of 3.4 BHP shares for each Mongolia Rioshare does not reflect the strength of its project pipeline. But BHP recently hit out at this.
Rio Tinto on Thursday night slammed Chinese steelmakers over increasingly aggressive negotiating tactics, after the China Iron & Steel Association called for its members to boycott the Anglo-Australian mining group’s spot sales of iron ore.
The steelmakers have failed to agree a 2008-2009 annual contract price with
Rioand BHP Billiton despite months of talks. Earlier this year, the Chinese authorities delayed issuing permits needed to import some shipments of Australian iron ore, a move that was also considered a negotiating ploy.
Rio has demanded a price for the annual contracts in excess of the 65-71 per cent rise agreed between Vale, the Brazilian miner, and Chinese steelmakers. The Chinese pay less to ship Rio’s ore from
. Australia Rio, which is fighting a hostile takeover bid from BHP worth at least $160bn, has also provoked the Chinese by threatening to move away from traditional long-term contracts by selling more ore into the spot market, where prices are higher.
In a statement published on its website on Thursday, CISA said: “We appeal to domestic mills and traders not to support or take part in Rio Tinto’s spot iron ore sales activities in
.” China Riosaid it was entitled to sell into the spot market. “For CISA to suggest joint action by the Chinese steel industry to prevent this is a very concerning development.”
Spot iron ore prices of $180-$190 a tonne are markedly higher than the $108 a tonne agreed by Vale and its Chinese customers.
CISA, whose members are
’s large steel mills, accused Rio Tinto of acting in bad faith, telling customers it lacked supply to completely fulfil long-term contracts while at the same time offering iron ore on the spot market to capture higher prices. China
Riohad only supplied 86 per cent of iron ore specified under contracts in 2007 with Chinese clients while in 2006 it only supplied 88 per cent of the agreed amount. Around 20 Chinese steelmakers have long-term supply contracts with Rio Tinto.
Riosaid the comments should be considered in the “context of our ongoing price negotiations”. It rejected the CISA’s claims and added it had “rights under a number of contracts that include options to reduce volumes. Riowill continue to negotiate in good faith for a pricing outcome that reflects the continuing strong market fundamentals.”
Sam Walsh, chief executive of
Rio’s iron ore division, said that when the iron ore market was tight, it was understandable that mills wanted to maximise their iron ore volumes. “However, Rio Tinto remains determined to achieve a fair pricing outcome for its shareholders,” Mr Walsh said.
Rio also pointed out that the Baltic Index for freight rates from
Brazilto is at a record differential compared to freight rates from Australian ports. Iron ore exported from China Western Australia’s Pilbara region is nearly three times closer to Chinathan ore shipped from . Brazil Rioand BHP want to share the Chinese steelmakers’ savings from cheaper freight costs.